Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005

compared to future generations¹⁹ .

5.4 Sensitivity and risk

The calculations presented above apply to the base scenario, but various as-
sumptions can of course be discussed. Moreover, it is important to identify the
risk factors which may affect public finances the most. It is therefore impor-
tant to perform a sensitivity analysis. The results of such sensitivity analyses
are given in table 1 in terms of the changes in the sustainable tax rate. Similar
analyses can easily be done for the PAYG-tax but are left out here to economize
on space.

Table 1. Sensitivity — changes in the base tax rate under various
alternative assumptions

Change in base tax

Base scenario                                                     7.9

Demographics

UN growth in life expectancy                                  16.7

Increased fertility (from 1.7 to 1.8)                                 8.6

+5000 immigrants annually - more developed countries          7.9

+5000 immigrants annually - less developed countries           11.2

Welfare services and leisure

0.10% reduction in work time per year                          1.0

extra 0.15% real growth in welfare service per year               15.6

Labour market

Higher labour force participation descendants
from less developed countries                                     6.2

Interest rate and growth

0.5 percentage points higher interest rate                         4.8

0.5 percentage points higher growth in TFP                    14.0

Health care

"Year to death" and age dependency                          7.3

"Year to death" and age dependency +
increasing standards                                             14.5

Source: Velfærdskommissionen (2005d).

In the following we shall comment on two particular important aspects of
the sensitivity analyses.

¹⁹See Jensen et.al.(2002) for a comparison of equivalent variation measures and generational
accounts in the DREAM model. The analysis suggests a similarity in relative changes but
differences between the two measures occur primarily due to differences in discount factors
and the effects of bequest.

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